U.S. Debt Crisis to Bring Questions to Dollar's Long-Term Status: Standard Chartered Chief Economist

LONDON, Aug. 12 (Xinhua) -- The U.S. debt crisis will bring more questions to the longer-term outlook of the U.S. dollar, Standard Chartered chief economist Gerard Lyons told Xinhua in an interview.

Although its current status as a reserve currency would not be changed immediately after the U.S. debt crisis, but the dollar "looks vulnerable," said Lyons, adding that "worries about the longer-term outlook for the U.S. economy do raise long term questions about its currency."

Meanwhile, the global context of the crisis, a shift in the balance of power from the west to the east, also raised questions about the dollar, Lyons said.

Rating agency Standard & Poor's downgraded the U.S. credit rating from AAA to AA+ last Friday, the first time in history for the country to lose its top-grade rating.

Lyons, however, criticized S&P's downgrade as "a wrong decision at a wrong time for wrong reasons."

"The U.S. will pay its debt." Lyons said.

Lyons took the latest U.S. debt crisis as a continuation of the crisis from three to four years ago. As a result, he expected the U.S. Federal Reserve to continue with its intervention policies for the past several years, including keeping interest rates low, providing liquidity and probably a third round of quantitative easing.

"If QE3 looked unlikely three or four months ago, it looks quite likely after the crisis," Lyons said, dismissing the possibility for an immediate exit of the Fed's interventions as the U.S. economy is not strong enough.

The realization among international investors and policy makers that the recovery in the U.S., Britain and across the Europe is going to be a weak one is one of the key factors that have led to the latest uncertainty and volatility on global equity markets.

"The U.S. recovery is very, very sluggish," said Lyons, who yet denied that a second recession is approaching although if confidence were to collapse, there could be a double-dip.

"A double-dip requires one of three things to happen: a policy mistake, an outside shock and loss of confidence," said Lyons, stressing that the last one is mostly unpredictable.

"If confidence evaporates, that means companies or people who have money to spend will decide not to spend. The current back drop of customer spending in th U.S. is very fragile. That's why confidence is such a key part of determining whether there will be a recession or not."

As a result, policy makers need to reassure the market not just with words but with global coordinated policy actions, which means major world players should act together at the same time, Lyons said.

He regarded austerity as a "policy mistake," saying governments have to spend when companies are not spending.

Instead of austerity, Lyons thought the only way to address the U.S. debt problem is for the government to spend more, boost demand and finally realize stronger economic growth.

"Bizarrely enough, the fiscal situation needs to get worse before it gets better," Lyons added.

Talking about lessons from the ongoing U.S. and eurozone debt crisis, Lyons emphasized the necessity of running a budget surplus in boom times.

As the U.S. debt crisis has broken out and the eurozone sovereign debt crisis is spreading, Lyons suggested investment in emerging nations' government bonds, as well as good-shaped multinational corporations as alternative safe havens.